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The risks of an economic 'hard landing' are rising in the US

The U.S. economy is now at an increased risk of having a “hard landing,” according to economists at Barclays.

Using language usually reserved for discussing the economic outlook in China, Barclays’ Michael Gapen writes in a note Tuesday that in the wake of tax cuts the “risks of a hard landing are rising” for the U.S. economy.

“We believe that tax cuts will stimulate household spending faster than business investment can improve productivity and, as a result, some of the output growth in our forecast will be accomplished through additional hiring,” Gapen said.

“We see the unemployment rate drifting lower over the course of the year, raising alarms in some corners of the [Federal Open Market Committee] about future inflation pressures or, more likely, financial stability concerns.”

The faster they rise, the harder they fall

A “hard landing” is economist-speak for an economic downturn that comes on suddenly after a surge in economic growth. The risky picture Gapen paints for the U.S. economy is one where inflation picks up as a result of increased consumer spending, spurring the Federal Reserve to raise interest rates more quickly than expected by markets. Higher interest rates could quickly tighten credit conditions and thus prompt an economic downturn.

Since the financial crisis, the U.S. economy — as well as those of other major Western economies — has been mired in a slow-growth path that some economists have called “secular stagnation.”

A US Postal worker takes down a frozen American flag after the top hook that attached it to the pole broke, Wednesday, Jan. 3, 2018, in Savannah, Ga. (AP Photo/Stephen B. Morton)

The passage of tax cuts by the Trump administration late last year, however, led many economists — including those at the IMF — to say that the global economy is likely to see its strongest growth since the crisis through the end of the decade. This economic optimism combined with increased profits from lower tax burdens has helped fuel the rally in markets we’ve seen since the start of the year.

“The biggest factors driving the US equity markets remain improved economic and corporate fundamentals and a process of interest rate normalization by the Fed that so far has been sensitive to an environment that is governed by secular trends of globalization and technology,” said John Stoltzfus, chief investment strategist at Oppenheimer.

Market action on Tuesday, however, shows that to some extent investors are growing cautious about the unbridled enthusiasm that has predominated in 2018. Near midday, the major U.S. indexes were down more than 0.8%; on Monday the S&P 500 broke a 99-day streak of not losing more than 0.6% in a single trading session.

A few days’ worth of negative action in financial markets does not change the economic picture in the U.S. Unemployment is still low, consumer confidence is elevated, business confidence is high, and until there is an outright decline in consumer spending — which accounts for about 70% of GDP and rose at an annualized rate of 3.8% during the fourth quarter — the economy isn’t likely to see a recession.

But how hot the economy gets before that point, and how aggressively the Fed acts to cool off the economy, will determine whether we drift into the inevitable future recession or see an economic hard landing in the U.S.

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Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland